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Proxy Access Moves Forward: Forest Labs, Medtronic & H&R Block

August 1, 2012 in General

The cartoon at left accompanied an article entitled Where are the funds? (Pensions & Investments, 3/5/2012). P&I lamented, “instead of sitting on the sidelines, activist investors should take advantage of the opportunity to file access proposals… proxy access proponents must be adventurous.” Working through the USPX, individual shareowners are using the key; adventure is on the way.

Individual shareowner Ken Steiner has three proxy access proposals—all based on the updated USPX model proxy access proposal—coming up for votes at  Forest Labs ($FRX) on August 15th, Medtronic  ($MDT) on August 23rd and at H&R Block ($HRB), whose proxy materials have not yet been released. All three proposals survived no-action challenges at the SEC. Read the rest of this entry →

It’s Working!!!

January 19, 2012 in General

Eleven weeks ago, we launched the new USPX social networking website. The goal was to create an on-line community for our members to self-organize around issues. Guess what? It is working!!! Already, members Jim McRitchie, Steven Towns and myself have transfered exiting blogs to the USPX website. Members Krassimir Kostadinov, Marko Robinson and Daniel Rudewicz have launched new blogs.

We are at that time of year when most shareowner proposals for the spring have been submitted. Companies are responding with no-action requests to the SEC, and shareowner-proponents are submitting rebuttals. Just this week, I noticed how several members were simultaneously blogging about the process and what they were experiencing with their own proposals. What is more, they were reading each others’ blogs and responding. Nowhere else on the web will you find an active discussion between individual shareowners about their Rule 14a-8 proposals. We’re creating something new!

Just this morning, member John Chevedden copied me on an e-mail to member Steven Towns. Steven had just blogged about his success overcoming a no-action request against his proposal for GE. John had just overcome a no-action request made by GE against one of his proposals. Both no-action requests had been filed by a single law firm, Gibson Dunn, on GE’s behalf. John’s e-mail communicated that sense of comeraderie that comes from overcoming shared adversity. He proposed to Steven that they coordinate their efforts to find someone to attend the GE annual meeting to move both proposals for them.

When I read John’s e-mail, I knew the website was working!

Not all features of the website have been as successful as member blogs. For example, the website’s groups functionality is languishing. I think it will be more effective once we implement automated e-mails to notify group members of group activity.

Upgrades to the website are planned. Because we are an all-volunteer movement operating on a shoestring budget, those upgrades will take time. That doesn’t matter. Communities aren’t about the latest technology. They are about the enthusiasm and commitment of members. We have plenty of both!

Thank you bloggers. If any of you have questions about the blogging technology or would like help customizing the appearance of your blog, let me know. I will be glad to help. For everyone else, enjoy the blogs …. and think about launching you own. Join the conversation!

Reform Proposals Delayed But Not Blocked by Apache and KBR.

December 1, 2011 in General

After two years or legal wrangling, the charade is up. A reform proposal Apache Corp. (APA) has tried to keep from a shareowner vote was resubmitted on Wednesday. It is a fairly benign proposal that, if passed, will ask the board to:

… take the steps necessary so that each shareholder voting requirement in our charter and bylaws that calls for a greater than simple majority vote be changed to require a majority of the votes cast for and against the proposal, or a simple majority in compliance with applicable laws.

This same proposal has been submitted to various corporations by a number of shareowners. It has won from 74% to 88% support at Weyerhaeuser, Alcoa, Waste Management, Goldman Sachs, FirstEnergy, McGraw-Hill and Macy’s. Supermajority voting requirements have been found to be one of six entrenching mechanisms that are negatively related to company performance.[1] The proposal is “precatory”—if passed, it merely asks the board to consider the reform. It does not compel them to implement it.

Apache appears to object not so much to the proposal itself as to the fact that a shareowner had the teremerity to submit it in the first place. That shareowner is John Chevedden, a champion of shareowners across the country who has submitted numerous reform-minded proposals to corporations, winning majority votes for many of them.

Apache’s CEO, Stephen Farris, argued in a 2007 comment letter to the SEC that precatory proposals should be banned. In 2009, when Chevedden first submitted this precatory proposal to Apache, Farris hired an expensive Houston lawyer, Geoffrey L. Harrison of law firm Susman Godfrey, to sue Chevedden in federal court. The law firm cobbled together a case based on an absurd reinterpretation of an SEC regulation related to how proposal proponents demonstrate that they own shares in a targeted corporation. The issues were highly technical, and Chevedden was defending himself. The USPX stepped in with a amicus curiae brief that sorted out the technicalities, laying bare how rediculous Apache’s claims were. The presiding judge, Lee Rosenthal, rejected those claims out of hand, but she found a contrived excuse to rule in Apache’s favor, so Apache could exclude Chevedden’s proposal from their proxy materials on that one occasion. (See Apache v. Chevedden, April 9, 2010)

Apache’s reinterpretation of the SEC regulation was rejected, but lawyers and other corporate enablers ignored that detail, treating the decision in Apache’s favor as an acceptance of that reinterpretation. That was the spin given in legal blogs and newsletters. How many people were going to wade through the technicalities of the lawsuit to discover that the blogs and newsletters were implying a falsehood? Based on the decision, Apache appeared intent on ignoring future proposals from Chevedden. That position was indefensible, but who was going to compel them to do otherwise?

It would be eighteen months before the SEC clarified its regulation. In the mean time, the same Houston lawyer, Harrison, brought another lawsuit against the same shareowner, Chevedden, before the same Houston judge, Rosenthal. This time, the client wasn’t Houston based Apache Corp. It was Houston based KBR Corp. (KBR). The issue was the same contrived reinterpretation of an SEC regulation, this time challenging a proposal Chevedden had submitted to KBR. (See KBR Bellies Up To The Bar, January 11, 2011)

Suspecting that Rosenthal was the sort of judge who made up her mind first and then bent the law to suit her decision, Chevedden approached the second lawsuit diferently. He challenged the judge’s authority, arguing that KBR had no grounds to sue Chevedden over SEC regulations. They should have sued the SEC! Chevedden found a lawyer who, while insisting on anonymity, informally helped Chevedden prepare this response. It was good law. The strategy was to ignore the Rosenthal court but to appeal whatever decision she made. District judges don’t like having their decisions appealed, especially if they will be overturned.

On April 4, 2011, Rosenthal made a preliminary ruling in KBR’s favor. Taking a swipe at Chevedden, she also required him to cover KBR’s legal costs. She had declined to do that in Apache v. Chevedden. Based on her preliminary ruling, KBR excluded Chevedden’s proposal from their proxy materials. But until Rosethal produced a final ruling, the case would remain open. Chevedden could not appeal and, of course, KBR could not collect their court costs. Months passed, and Rosenthal did not act. It started to appear that, having enabled KBR to exclude Chevedden’s proposal, she would avoid an appeal by simply never finishing the case. It has been eight months. Chevedden has petitioned the court for a final ruling. Rosenthal is silent.

On October 18, 2011, the SEC released Staff Legal Bulletin 14F to clarify the regulation at issue in the Apache and KBR lawsuits. This rejected much of Apache’s convoluted reinterpretation of the regulation, but not all of it. Throwing a bone to corporate interests, the SEC made it more dificult for shareowners to prove their ownership of shares for the purpose of submitting shareowner proposals. In many cases, proponents will have to obtain evidentiary letters from two different financial institutions. (See SEC Plays King Solomon: Divides Proposal-Baby In Half, October 19, 2011).

The good news is that Staff Legal Bulletin 14F supersedes Judge Rosenthal’s decisions. Under its provisions, Chevedden has resubmitted his Apache proposal. For good measure, he has also resubmitted his KBR proposal. What are Apache and KBR going to do now? The next move is theirs.

Footnotes    (↵ returns to text)
  1. Source: “What Matters in Corporate Governance?” by Lucien Bebchuk, Alma Cohen and Allen Ferrell, Harvard Law School, Discussion Paper No. 491 (September 2004, revised March 2005)

Proxy Access for the 99% – USPX Members Organize

October 25, 2011 in General

The time has come for shareowners to be allowed to include their own nominees for corporate boards in the proxy materials their corporations send out every year—so-called “ballot access.”

The current system—that only allows shareowners to vote for candidates nominated by the current board—is absurd. The SEC has finally reaffirmed shareowners’ right to submit proposals to corporations that, if adopted, would allow proxy access for those corporations’ shareowners.

A number of such proposals will be submitted for votes at 2012 annual meetings, but the wording is important. Some of the largest institutional investors plan to submit proposals to grant proxy access but I anticipate they will require high thresholds of ownership that will be difficult for even large investors to meet. What about the rest of us?

If individual investors—not to mention small and medium sized institutional investors—want ballot access for ourselves, we are going to have to submit our own proposals. Let’s take the lead and make it happen.

I’ve written a draft proxy access proposal (see below). I have also formed a members group on the United States Proxy Exchange website, where we can discuss the draft, make changes, and agree on a final version. Then we can each submit that proposal to corporations we own. To get involved, visit the Proxy Access Group to sign up for membership. Also, send me your e-mail address at jm@corpgov.net, so I can distribute a complete e-mail list to group members. If you are not yet a member of the USPX, join now.

Proxy access will allow shareowners to nominate and elect directors with new perspectives and skills. This will move us from corporate governance version 1.0, where shareowners beg for changes through advisory proposals, to version 2.0 where we can count on board members to represent our interests. Help us design the framework so that we can hit the install button during the 2012 season.

Below, I give background information, present my draft, and provide more information on the new members group.

Background

Proxy statements are by law company documents, not management documents. As such, access to the proxy for the purpose of listing director nominees should be available to all shareowners, not just the board’s nominating committee.

In 1977 the SEC held a number of hearings to address corporate scandals. At that time, the Business Roundtable (BRT) recommended amendments to Rule 14a-8 that would allow access proposals, noting such amendments

… would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law.

Soon, we saw several proposals. In 1980 Unicare Services included a proposal to allow any three shareowners to nominate and place candidates on the proxy. Shareowners at Mobil proposed a “reasonable number,” while those at Union Oil proposed a threshold of “500 or more shareholders” to place nominees on corporate proxies.

One company argued that placing a minimum threshold on access would discriminate “in favor of large stockholders and to the detriment of small stockholders,” violating equal treatment principles. CalPERS participated in the movement, submitting a proposal in 1988 but withdrawing it when Texaco agreed to include their nominee.

These early attempts to win proxy access through shareowner resolutions met with the same fate as most resolutions in those days. As of 1986, only two proposals of the thousands submitted had ever been approved—but the tides of change were turning. A 1987 proposal by Lewis Gilbert to allow shareowners to ratify the choice of auditors won a majority vote at Chock Full of O’Nuts Corporation and in 1988 Richard Foley’s proposal to redeem a poison pill won a majority vote at the Santa Fe Southern Pacific Corporation.

In 1990, without public discussion or a rule change, the SEC began issuing a series of no-action letters on access proposals. The SEC’s about-face may have been prompted by fear that “private ordering,” through shareowner proposals, was about to begin in earnest.

Tensions over this giant leap backward rose until AFSCME v AIG (2006). That case involved a 2004 bylaw proposal submitted by the American Federation of State, County & Municipal Employees (AFSCME) to the American International Group (AIG) requiring that specified nominees be included in the proxy.  AIG excluded the proposal after receiving a no-action letter from the SEC and AFSCME filed suit.

The court ruled the prohibition on shareowner elections contained in Rule 14a-8 applied only to proposals “used to oppose solicitations dealing with an identified board seat in an upcoming election” (also known as contested elections).

The SEC subsequently adopted a rule banning proposals aimed at prospective elections. But in 2010, the commission adopted both a new Rule 14a-11, specifying a minimum proxy access requirement for all public corporations, and amendments to Rule 14a-8(i)(8) to allow shareowners to submit proposals for more robust proxy access at corporations they own share in.

The US Court of Appeals for the DC Circuit found the new Rule 14a-11 “arbitrary and capricious.” This means our only current option for achieving proxy access is through shareowner proposals filed on a company by company basis under the amended Rule 14a-8.

Shape the Future

The USPX members group I am forming will

  1. refine a draft model proposal,
  2. identify possible target companies,
  3. tailor submissions to those companies, and
  4. defend against no-action requests by companies to the SEC.

I welcome participation. If you are not already a USPX member, hit the join now button. Once you sign up you will be able to see and join groups. We will be communicating with various web-based tools, e-mail and by phone.

While any actual shareowner proposal will contain a statement demonstrating the need for proxy access and company specific arguments, we will first concentrate on the “resolved” language and point-by-point justification. Below is my draft “resolved” language. I am sure group members will offer plenty of improvements.

Draft Resolved Language

RESOLVED, Shareowners ask our board, to the fullest extent permitted by law, to amend our bylaws and each appropriate governing document to:

  1. Disclose, in our proxy statement, properly nominated and vetted “qualifying” director candidates, regardless of whether the nomination is made by the nominating committee or shareowners.
  2. Define “qualifying” candidates as those nominated by the board and nominees who have legally consented to nominations submitted by shareowners meeting the minimum requirements of stock ownership to submit proposals under SEC Rule 14a-8.
  3. Develop fair and objective standards to reduce the number of “qualifying” candidates nominated by shareowners to a number equal to one quarter the number of board nominated candidates in such instances where the number of qualifying candidates nominated by shareowners would otherwise exceed such number.
  4. Ensure all nominees meet federal, state and corporate requirements.
  5. Ensure eligible shareowners can nominate only one “qualifying” candidate each during each election cycle.
  6. Ensure director qualifications do not vary depending on the source of the nominee and there is no prior agreement with the company or its representatives regarding shareowner nominations.
  7. Provide for comparable disclosures regarding director nominees and nominators, regardless of the source of the nomination.
  8. Ensure the proxy statement lists the source of nomination for each “qualifying” candidate.
  9. Ensure the company’s proxy card gives eligible shareowners the opportunity to vote for any “qualifying” candidates included in the proxy statement.

Explanation of Provisions

  1. Direct access to the company proxy has long been considered the most direct and cost effective method of allowing shareowners a meaningful role in the nomination and election process. As Les Greenberg and I argued in our petition to the SEC for proxy access more than ten years ago, “entrenched managers and directors will only improve corporate governance when they can be held accountable, e.g., voted out of office and replaced with directors chosen by shareholders.”
  2. SEC Rule 14a-4(d)(4) prohibits a nominee from being listed unless they have consented to being named in the proxy statement and to serve if elected. I set the bar for nominating directors at the same level as for submitting proposals under SEC Rule 14a-8, since this time-honored standard is surrounded by court decisions, SEC guidance, and no-action letters.
  3. The aim here is to go with the same 1/4 limit as the overturned Rule 14a-11, making a substantial change in board composition without triggering a change-in-control. The language also gives the current Board flexibility in arriving at a fair and objective standard as to which nominees get on the proxy when more are nominated than the 25% standard. The chances of winning a change-in-control fight through proxy access would be minimal, since other shareowners usually expect to be paid a change-in-control premium by a controlling acquirer. Obtaining approval from ISS, Glass-Lewis and other proxy advisors is considerably harder for a change-in-control slate than from a short slate. Change-in-control could also trigger provisions in debt instruments, employee agreements, severance agreements and other contracts resulting in costly disruptions. Yes, we can expect some boards to game the system with unfair standards. Hopefully, ISS, Glass-Lewis and others will call them on it and recommend voting against directors that play such games.
  4. Since the company would be listing shareowner nominees in their proxy, they will need to ensure they meet all legal requirements. Otherwise they may face liabilities and shareowners would be voting for ineligible candidates. Legal standards are generally minimal, like not having declared personal bankruptcy or not having been found legally insane, so the cost of such an exercise should be minimal.
  5. Limiting shareowners to one nominee is an attempt to address concerns that “special interests” would take over boards. These concerns have been overblown, since directors have a fiduciary duty to the company and must win by a majority of all shares voted. However, it is a way of reassuring groups like the US Chamber of Commerce and Business Roundtable that no shareowner gains what these special interest groups would consider “undue” influence through the proxy access process.
  6. This provision is designed to ensure the company does not apply more stringent standards for shareowner nominees or short-circuit the access process through side agreements with nominees or nominators.
  7. This provision is to ensure a level playing field with regard to disclosures in the proxy and and their accessibility by shareowners.
  8. This provision will ensure that shareowners know the source of the nomination so they can make a fully informed decision.
  9. This provision is the main point; include all “qualified” candidates on the proxy card so that shareowners can vote for them.

Get Involved!

Since the timeframe for submitting proxy proposals is rapidly approaching for many corporations, time is of the essence. Additionally, I will be traveling for several weeks beginning the second week in November. Therefore, I would propose that we have the first phase of work done (model “resolved” language) by November 5th. Hopefully, the group can reach consensus by then.

Of course, with or without consensus, anyone is free to use the language however they want. After November 5th I would hope the group can move on to identifying possible targets and submitting proposals. Key will be choosing targets where shareowners already recognize a lack of board leadership and will be ready to vote for change.

Again, here are the links you need to join the USPX and then join the new  Proxy Access members group. Don’t forget to e-mail me at jm@corpgov.net, so I can add your e-mail address to the master distribution list.

Reuters Spotlights the USPX

February 9, 2011 in General

Glyn Holton and Norman the cat.

Yesterday, Ross Kerber of Reuters wrote a wonderful piece describing the USPX. It focuses on Glyn Holton and one of our less-known members: Norman the cat. You can read the article here.